Following “hot stock tips” doesn’t usually pay off. Lately, there has been a lot of buzz surrounding this topic, though. In this video, Brendan breaks down why he doesn’t like to give clients hot stock tips and shares a few words of advice if you’re considering committing a substantial portion of your portfolio to stocks.
Topics Discussed:
Why Brendan doesn’t like talking “hot stock tips”
What studies show about investors’ ability to outsmart the market
The mindset you need if you’re going to play the stock market
How public insider activity might guide your choices
What you need to remember as a retail investor
Transcript:
Hi, and welcome to another edition of coffee with Brendon. Today we're going to talk about something that I really don't like talking about, which is hot stock tips, we actually put it right on our website, you know, that we do not like, to offer hot stock tips to clients. In fact, you know, right on our homepage, if you look down here, you know, we actually say, our, our the type of client that we specialize in, they're not gamblers that you know, they're not risk-averse, they're not going to commit large portions of their portfolio to the next big investment or hot stock tips.
So long story short, this is something I don't like to talk about. But there's a reason why I'm talking about it right now is because I have a number of clients, and I don't know what what's happened over the last few weeks, but that have been asking me, you know, what's the next what do you have an idea for another stock that I should be looking at. And so one of the main reasons why I don't like talking about this stuff, is that investors and frankly, us too, you know, financial advisors, were terrible at trying to outsmart the market, you know, if you look at this study is one of my favorite studies to call the dowel bar study. And what it pretty much has done is, is every single 20 year period over the last, I don't know how long they've been doing this for I think it's been over a decade, that they've been doing rolling 20 year periods and testing to see what asset classes have outperformed best.
And really where I pay the most attention to is how is the s&p 500 done, versus the average investor, s&p 500 over this 20 year period is made 7.5% on average each year, if you just simply invested in an index fund, or some kind of investment that pretty much tracked the 500 biggest companies in the United States. And if you just simply invested in that, put it in the bottom drawer, didn't buy and sell during good times and bad, didn't try to pick you know which of those 500 companies was going to do the best and which one was going to do the worst. And you just set it and forget it, you'd make seven and a half percent over the last 20 years. What did the average investor do, you probably already looked ahead 2.9% a fraction of what the old set it and forget it put in the s&p 500 has done. So what this is pretty much telling me is that individual investors are terrible at number one, timing the market and number two trying to pick out the individual companies that have done the best.
So let's say that you do, you're totally convinced that the certain company is actually going to do really well. And you acknowledge that this is really a hobby, you are not any kind of investing guru out there. Now one of the things I think I need to caution most people about is that if you're the average little guy investor, you do not have access to the people that make all the decisions. So in the case of Facebook, in the case of Tesla, you cannot just ring the doorbell and say I want to speak to Mark Zuckerberg or Elon Musk. However, some of these big money managers that are in charge or some of the most popular mutual funds out there, they actually do. And so there is something to be said for investing in a professional way with people that are following these companies. 24/7 have a whole team of people behind them, and furthermore, can knock on the door of these big CEOs and actually get an audience. You don't have the ability to do that. So acknowledge it for what it really is. It's a hobby, and you're listening to a bunch of people on whether it's CNBC or Tik Tok. And they're just giving their opinion on what they think is going to go on.
So acknowledge it for what it is do not put a huge chunk of your net worth into any one company 5000 $10,000 Fine, you know that that's the first a lot of people that say fraction of their net worth, so therefore it's not gonna kill you. That's rule number one. Never invest money in a company that you cannot, you cannot lose.
So if the company that you're in love with is the next front page story in a bad way, and the share price drops 50% in one day and or goes bankrupt, which would mean it goes down to zero. What does that mean? You can eat you can not invest In any one company, an amount of money that if you're not that you're prepared that you're not prepared to lose. So let me say that again, because I messed that up, do not invest a sum of money into any one stock that you cannot afford to lose the entire amount of money. And that would threaten your your goals. So let's say that that's the case, you're putting five to $10,000 in and you're really trying to get some kind of insider information on what's going on over and above what you're seeing on the news or in some kind of chat room.
One thing that I always point clients to is look at what the people in the executive suite are doing with their shares of stock. Obviously, a big chunk of their compensation is probably related to the company's performance, and therefore they have big chunks of stock. So I'll give you an example then. And this is all public information if it's a publicly traded stock.
So one company that has gotten a lot of buzz is a company called netlist. And I could get into why netlist is so popular right now. But long story short, I have a couple clients that are thinking about putting putting some money into this. And so what I've pointed them to is look to see what the insiders are doing. That's the CEO, the CFO, you know, the people that are in the boardroom making decisions on a day to day basis? Are they buying more shares of stock like you planning on doing or are they selling. And in this specific case, this is a great example of a big giant red flag. This is pretty much saying that over the last 12 months, these insiders, the people that know the most about the stock have only bought once. But meanwhile, they've sold 21 times. So a 21 to one ratio of selling to buy. That's a giant red flag to me that the people that really know what's going on with this stock are actually selling the stock instead of buying more.
Meanwhile, you as the retail investor are thinking about buying more. That doesn't seem to jive too well. So what you're pretty much saying, you know, we're really cutting to the chase here, you're really saying you know more about their company than they do. So who knows, you know, you could be right, you could be wrong, you know, obviously, along the way, Elon Musk has sold some shares of his company while the share price has just gone to the moon. So there are certain times when Yeah, anyone's going to take a little bit of money off the table if you're an executive. But you know, these types of ratios 21 to one are definitely a red flag for me. So that's all I got for today. I hope you have a great weekend and I hope again, this was a helpful video. Have a great weekend and we'll talk next week.
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